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How does a price ceiling affect the equilibrium price?
Price ceiling will only affect the equilibrium price if its binding.
Price ceiling is the maximum legal price of a product that can be charged to it. It is a government controlled market mechanism which is made to protect the buyers from higher price charged by the seller.
Price ceiling are of two types:
- Binding
- Non-Binding
Non-binding price ceiling does not affect the equilibrium price.
Binding price ceiling will affect the equilibrium price. The equilibrium price hence would be equal to the price ceiling.
The binding price ceiling will create shortage and hence rationing occurs.
